7. Stock Options, Restricted Stock and Warrants

In March 2000, the Company adopted a Stock Option Plan (the “2000 Stock Plan”) as approved by its Board of Directors. Under the 2000 Stock Plan, the Company granted options to acquire up to 1,600,000 shares of common stock. In connection with the adoption of the 2006 Employee, Director and Consultant Stock Plan, as further discussed below, the Company is to grant no additional options under the 2000 Stock Plan. Under the 2000 Stock Plan, there were no options to purchase shares of the Company’s common stock that remained outstanding as of December 31, 2013. Prior to March 2007, the Company also granted options to purchase 16,000 shares of common stock to two consultants which were granted under separate agreements outside of the 2000 Stock Plan.

On October 26, 2006, the Board of Directors of the Company approved, and on May 1, 2007, reapproved the adoption of the 2006 Employee, Director and Consultant Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock Plan on June 1, 2007. The initial number of shares which may be issued from time to time pursuant to the 2006 Stock Plan was 2,160,000 shares of common stock. Also, the 2006 Stock Plan includes the number of shares subject to purchase under options issued under the 2000 Stock Plan, where the options expired on or after October 18, 2006, subject to a maximum of 210,000 additional options. In addition, on the first day of each fiscal year of the Company during the period beginning in fiscal year 2008 and ending on the second day of fiscal year 2017, the number of shares that may be issued from time to time pursuant to the 2006 Stock Plan is increased by the lesser of (i) 200,000 shares or equivalent, after determination of the effect of any stock split, stock dividend, combination or similar transactions as set forth in the 2006 Stock Plan, (ii) 5% of the number of outstanding shares of common stock of the Company on such date or (iii) an amount determined by the Board of Directors of the Company. The initial number of shares available for issuance of 2,160,000 increased by 210,000 for options issued under the 2000 Stock Plan expiring after October 2006 and by 200,000 in 2008 through 2014, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of June 30, 2014, there were 1,463,748 options available for grant under the 2006 Stock Plan.

Employee options vest according to the terms of the specific grant and expire 10 years from the date of grant. Non-employee option grants to date typically vest over a 2 to 3 year period. The Company had 2,210,229 options outstanding at a weighted average exercise price of $1.85 at June 30, 2014. There were 1,135,063 non-vested stock options outstanding with a weighted average grant date fair value of $1.34 at June 30, 2014. As of June 30, 2014, there was $844,038 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.4 years.

Except for certain grants of restricted common stock and common stock options containing market conditions as described below, the Company estimated share-based compensation expense for the three and six months ended June 30, 2013 and 2014 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2014			2013			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Risk free interest rate		0.90-1.40	%		—	%		0.90-1.40	%		—	%
Expected dividend yield		—			—			—	%		—	%
Expected volatility		102.2-103.0	%		—	%		102.2-104.9	%		—	%
Expected term **(in years)		6.25			—			6.25			—
Forfeiture rate		7.0	%		—	%		7.0	%		—	%

** Expected term is calculated using SAB 107, Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate given the Company’s lack of history of option exercises.

The following table summarizes the stock option activity for the 2006 Plan for the six months ended June 30, 2014:

	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2013		2,288,076	$	1.83		8.41	$	1,082
Granted (Unaudited)		—	$	—		—		—
Exercised (Unaudited)		(20,000)	$	1.16		8.08		7,605
Expired (Unaudited)		(10,158)		1.40		8.62		—
Forfeited (Unaudited)		(47,689)	$	1.35		—		—
Outstanding, June 30, 2014 (Unaudited)		2,210,229	$	1.85		7.89	$	—
Exercisable, June 30, 2014 (Unaudited)		1,075,166	$	2.39		6.71	$	—

The weighted-average grant-date fair value of options granted during the three and six months ended June 30, 2013 was $1.39 and $1.38, respectively. The Company did not grant any options during the three months ended June 30, 2014.

The following table provides additional information regarding options outstanding under the 2006 Plan as of June 30, 2014 (unaudited):

		Options Outstanding		Options Exercisable
	Exercise Price	Number of Options	WA Remaining Contractual Term	Number of Options	WA Remaining Contractual Term
$	1.00 to 1.99	1,705,229	8.61	622,278	7.80
	2.00 to 2.99	287,500	7.07	235,388	6.97
	3.00 to 3.99	71,000	4.08	71,000	4.07
	4.29	11,500	3.15	11,500	3.15
	7.00	135,000	2.94	135,000	2.94
		2,210,229	7.89	1,075,166	6.71

Stock-based compensation expense was classified as follows in the results of operation:

	Three Months Ended June 30,				Six Months Ended June 30,
	( Unaudited )
	2013		2014		2013		2014
Cost of revenue	$	14,898	$	10,963	$	28,384	$	22,219
Research and development		8,916		12,494		18,758		25,691
Sales and marketing		(4,427)		16,728		12,973		32,477
General and administrative		69,134		172,834		133,729		317,401
Totals	$	88,521	$	213,019	$	193,844	$	397,788

Thomas Bologna was appointed Chief Executive Officer of the Company on December 21, 2011 and in connection with his appointment, Mr. Bologna was awarded stock options outside of the 2006 Stock Plan. Pursuant to the employment agreement between the Company and Mr. Bologna, dated December 21, 2011, and in reliance on NASDAQ Listing Rule 5636(c), the Company granted Mr. Bologna (i) a stock option to purchase 600,000 shares of the Company’s common stock, which vests monthly over 36 months from the date of grant, subject to his continued employment with the Company, (ii) a stock option to purchase 300,000 shares of the Company’s common stock, which vested in 2012, and (iii) 270,000 shares of restricted common stock of the Company, which vest on the date on which the 30-day trailing average closing price of the Company’s common stock equals or exceeds $2.40. The exercise price of the stock options is $1.20 per share, the closing price of the Company’s common stock on the day prior to the date of grant. The expense recognized in connection with these grants was $44,531 and $44,531 for the three months ended June 30, 2013 and 2014, respectively, and was $89,061 and $89,061 for the six months ended June 30, 2013 and 2014, respectively, and is included in the above table.

The following table summarizes these awards to Mr. Bologna:

Type	Grant Date	Number of Awards	Intrinsic Value as of June 30, 2014		Exercise Price		Options Exercisable		Remaining Contractual Term
Restricted Shares of Common Stock	12/21/2011	270,000	$	248,400	$	—		—		7.5
Options	12/21/2011	600,000	$	—	$	1.20		500,000		7.5
Options	12/21/2011	300,000	$	—	$	1.20		300,000		7.5

On March 12, 2014, the Company granted 62,500 shares of restricted common stock, with a value of $86,250, to a vendor in connection with a contract for services. The shares vest monthly in equal installments from April 2014 through December 2014. At June 30, 2014, 20,833 shares had vested. The expense recognized in connection with this grants was $28,750 for the three months and six months ended June 30, 2014 and is included in general and administrative expense in the above table.

On July 30, 2014, subsequent to the end of the quarter, the Company issued an initial warrant to purchase 681,090 shares of common stock in connection with the SWK Funding LLC credit agreement. The warrant is exercisable up to and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment, on a cashless basis at any time. Pursuant to the SWK Funding LLC credit agreement, upon funding of the second tranche of the commitment under the credit agreement, the Company will be required to issue a second warrant to SWK Funding LLC. The number of common shares that could be purchased under the second warrant will be calculated if and when the Company draws the second tranche of funding under the credit agreement. (See Note 11.)